Economics 1
Spring 1996
	2nd Midterm Exam - MAKEUP


Instructions:
1.	Answer all sections of this test. This is a 60 minute exam.  
2.	Graphs are helpful. Carefully label all graphs that you use.
3.	Write all answers in the blue books provided. Show all work.
4.	Write your name and your instructors name in every blue book that
you use.
5.	This exam is given under the rules of Penn's Honor System.
6.	All blue books, blank or filled, must be handed in at the end of
this exam. No blue books may be taken from this room.


Part I: True/False (32 minutes)

Please give reasons for your answer to receive any credit at all. Support
your answers with appropriate and clearly labeled diagrams wherever possible.

1. If there are increasing returns to scale then average costs are a
decreasing function of output.

2. Average costs can never rise when marginal costs are declining.

3. If marginal costs of one of the many perfectly competitive firms
increase, whereas those of the other firms stay the same then the industry
price will increase.

4. Under monopolistic competition costs are not minimized therefore this
industry is necessarily inefficient.

5. Two isoquants intersect when they have the same slope.

6. Monopolies produce the output for which marginal cost equals marginal
revenue.

7. Advertising is a waste of money.

8. The individual members of a cartel want to raise prices to increase
their output.
Part II:  (20 minutes)

 Complete the following table and answer the following questions.

	Q	TC	P	Demand	TR	MR	MC	Profit
	0	20	17	0
	1	23	16	1
	2	27	15	2
	3	32	14	3
	4	38	13	4
	5	46	12	5
	6	57	11	6
	7	69	10	7

a. If the firm is a monopoly:
	(i) What is the profit maximizing level of output?
	(ii) What price will the monopolist charge?
	(iii) What are the profits?
	(iv) Can this be a long run equilibrium? Explain why?


b. If this firm could pursue perfect price discrimination what would be
the output and profit for this firm?

c. If this is a perfectly competitive industry:
	(i) What is the profit maximizing level of output
	(ii) What price will the output be sold at?
	(iii) What are the profits of each firm if there are 9 identical firms?
	(iv) Can this be a long run equilibrium? Explain why?


Part III (8 minutes)

Suppose that a monopolist has declining marginal costs. Suppose also that
the marginal costs are declining much slower than marginal revenue so that
they look like the following:



















Can the monopolist operate in such a situation and maximize profit? If
yes, complete the diagram, clearly label it and mark the equilibrium price
and quantity. If no, then explain clearly the reasons for your answer.